How Much Equity Does One Need for a Home Equity Loan?

iQuanti: Your eligibility for a home equity loan can depend on a number of factors, but you’re likely to be approved if you have at least 20% equity in your home, you have a favorable debt-to-income ratio, good credit score, and a history of timely payments. These factors can also help you qualify for more favorable home equity loan rates from Discover or another lender, but the overall housing market can also affect them.
What is equity in a home?
Equity in a home is essentially how much of it you currently own. Equity is determined by the difference between what you still owe and the value of your home. If your home is worth $200,000 and you owe $150,000 on your mortgage, you have 20% equity or $50,000 of equity in your home.
A home equity loan is essentially a loan that you can take out using your home that you own as the collateral. That means if you fail to pay back your home equity loan, you could lose your home. 
How much can you borrow with a home equity loan?
The amount of equity you have typically informs the size of your loan. In the above example, your home equity loan would likely be 80-90% of $50,000 equity in normal economic circumstances. During unusual economic circumstances, such as the Coronavirus pandemic, lenders may restrict home equity loans further. 
Race, ethnicity, religion, gender presentation, disability, and other non-financial considerations should never play a role in a lender’s determination of how much you can borrow. 
How to build equity
Make a large down payment and mortgage payments
This is the fastest way to build equity in your home, and one reason why it can be advantageous to make a larger down payment of at least 20%. Similarly, the faster you pay down your mortgage, the faster you will build equity.
Increase the property value of your home
One of the most common reasons for taking out a home equity loan is to use the loan to pay for things like renovations that may increase the value of the home. 
Wait for the value of your home to increase
There’s no guarantee that the value of your house will increase, but generally speaking homes appreciate in value with time.
Conversely, your equity can fall if your home’s value decreases at a rate faster than the rate at which you pay down the principal balance of your mortgage.
Other factors that affect home equity loans
Debt-to-income ratio (DTI)
Your debt-to-income ratio compares your monthly debt payment to your monthly gross income. (Your monthly gross income is what you earn pre-tax and other deductions.) The percentage of your monthly gross income that goes towards paying your debts is your DTI. 
Your DTI ratio is a common metric mortgage lenders use to measure your ability to manage your payments. Your credit cards and other loans can also affect your DTI ratio. Generally speaking, lenders will want to see a DTI ratio less than 28% for front-end DTI (your housing debts) and less than 36% for back-end DTI (which accounts for all your debts). 
Credit score
Any lender might like to use your credit score to assess your liability as a borrower. The higher your credit score (generally at least a 620 or above), the better the chances you’ll be approved for a home equity loan. Also, higher credit scores will generally net you lower interest rates as well as more borrowing power. 
The bottom line
You generally need at least 15-20% equity in your home for a home equity loan. The more equity you have in your home the better chance you can get a home equity loan and the more borrowing power you have. It can’t hurt to make a home equity loan a long-term goal so that you have time to build both equity and credit for the best loan possible. 
Source: iQuanti, Inc.